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Occasionally my interest in etymology, history, science and finance align to illustrate a principle that applies as much today in marketing services finances as it did to the great Renaissance artists.

OK, that’s a huge, huge lie. Occasionally I shoehorn them together to make a point that might seem mundane without a different angle.

These interests, with a little imagination and goodwill on your part, come together when the concept of a spandrel is expanded from its original architectural meaning to be used in evolutionary biology. First, some definitions.

In architecture a spandrel is the roughly triangular space between an arch and a wall. The arches used to support great domes gave rise to these spaces and many artists used these spandrels as a canvas. Michelangelo’s Sistine chapel springs to mind. Full of spandrels in fact.

In evolutionary biology a spandrel is the adaption of one characteristic for another purpose – the best example of which is the use of feathers by dinosaurs to fly rather than their original thermoregulation use (kept them warm to you and me).

As an aside there is a fascinating argument about whether music is a spandrel of speech in human development or vice versa.

Whether it is the by-product space of architecture or dinosaurs finding that feathers also enable them to glide from tree to tree the common factor is that the process has thrown up an unplanned opportunity. The original feature can be developed into something unexpectedly valuable. By now, you might have a clue where I’m going.

The finance part of this thought came to me when I was sitting in on a meeting about a social media strategy which was made up of many different and interlinked elements. One project amongst many was about blogger engagement which caused some faces to light up as this was exactly what would excite the client far more than a complex social strategy. Put front and centre it was sold in. The other social stuff won’t be far behind.

This illustrated nicely to me the point that somewhere tucked away in every agency process there is a spandrel or two waiting to be discovered. It could be something you do but haven’t considered charging for like post launch support or a little gem tucked away in a larger process that clients would willingly pay for if only they knew about it. It could be the data collected along the way or, the holy grail of spandrels; it could be a technical development which can be resold. If you look hard enough there will be a spandrel in your agency. Find it, package it and sell it and you’ll have linked dinosaur’s feathers, Michelangelo to your agency process and maximised your revenue along the way.

If you need a hand to find your missing spandrel the author has spent the last 18 years unknowingly looking for them. Email him on simon@novemberfriday.wpengine.com if you’d like him to help maximise your agency’s revenues.

There are many ways to look at Agency profitability. From the top down you can look at revenue to resource ratios. From the bottom up you can look at actual versus estimated costs.

The first approach in my opinion is too removed whilst that latter can be too detailed. With a hefty nod to the 3 R’s of my school days I think the following R’s brings together a way of focusing on profitability that brings together the top down and bottom up approach so that the Agency FD can have a positive impact on the margin.

Rates and Recovery

Under recovery of hours is the silent killer, it’s the equivalent of high blood pressure for Agencies. Work more hours than you can charge and watch your margin dwindle away before your eyes. Recovery rates by department, by client gives you an incredible insight into estimating accuracy and operational efficiency.

It also gives you the perfect tool to talk to the only people who can make a real, short term change to company profitability; whoever puts the estimate together. They need to know if creative or production is regularly undercharged. You need to tell them and help support the client negotiation that might follow.

Under recovery may also be the result of operational inefficiency and you will need to work with department heads to understand if it is our under estimation of time or inefficient delivery that is the problem.

The importance of rates is self evident. However the interplay with recovery is interesting. Rates should always be backed by a salary cost/overhead/margin calculation (but ultimately determined by negotiation). In the cost calculation though you must make an allowance for unrecovered time, typically using 70% as a benchmark for time to be recharged.

The effect of recovery on margin becomes very clear when you do this calculation. A healthy 20% margin at 70% utilisation/recovery becomes a less than impressive 7% at 60%.

One effect of this basic maths is that it can cover up an issue with recovery. When I first started banging on about recovery it became very clear, very quickly that high margins didn’t necessarily mean high recovery. In fact high margins that relied on a more generous rate card nearly always covered up a recovery problem.

Either subconsciously or knowingly high rates encouraged over servicing and therefore low recovery. Maybe this is the right thing to do but I would always, always advocate knowing what your over servicing is. At the very least make sure your client is aware. There may come a time when there will be pressure on rates as well as an expectation of continuing service levels.

Risk

Life is full of risk. Each new project or new client has a risk. A project may overrun or a client not pay. A project which falls squarely into the core competence of the agency is low risk when compared to a more complex project that requires new skills or methodologies.

The Finance Director needs to be proactive in assessing risks. Credit checks on new clients should be taken and significant new projects assessed for risks. Factors which affect project risk are straight forward; new technology or project management methodologies increase risk as does the size and complexity of the deliverables. Timelines are important as well as the experience of the project team.

Steps to minimise risk at the outset will help preserve margin in the long run. Making sure that senior management is aware of the risk is vital if they are to sign off the upfront investment that might be required to ensure the risk is minimised.

We should always learn from our mistakes and never again will I let, say, a major website build go ahead without thinking about how it could go wrong and what we can do to make sure it doesn’t. The loss in margin spent correcting early mistakes in planning far, far outweigh the additional initial cost.

Resource

Having the right number of people with the right mix of skills doing the right things at the right time is the very definition of success. Get one of these factors wrong will have a knock on effect that will result in lower margins.

Look for constant use of freelancers. If you always have freelancers for core skills maybe you need to recruit. If you need freelancers for specialist skills then is there enough volume of work to recruit or would they enable the rest of the team to work more efficiently?

You should also look at the seniority and experience of the team. Too senior and either your margin or your competitiveness will be affected. Too junior and too much weight will be placed on the team lead.

Managing agency finances is a juggling act. I think these 4 R’s help manage them a little more effectively. Assess risks upfront, monitor recovery rates and review resource levels and you will have a positive impact on the margin.

The author, Simon Collard, has managed finance departments in the Marketing Services sector for 18 years. If you would like a chat if you need some help or advice please contact him on simon@novemberfriday.wpengine.com.